Overseas Residency Status in Relation to Canadian Tax Returns

One of the most difficult (and indeed one of the most important) aspects of Canadian tax law is one’s residency status overseas and how it may affect their income tax returns. In other words, how do Canadians that live or work overseas take care of filing priorities and how will this relate to their current living situation?

Residency is indeed the first factor that needs to be considered. Unfortunately, “residency” is not actually given a proper definition in the Canadian Income Tax Act. However, the Canada Revenue Agency (CRA) will give some solid guidelines intended to help Canadians determine the status of a residency in question. As you are likely already aware, everyone in Canada is required to pay tax on their globally accrued income; irrespective if they are in fact citizens or immigrants. Likewise, for those who study or work abroad, it is necessary to determine their residency status before filing a return. So, let us take a look at the main points that need to be considered.

Ties to Canadian Residency
This is the first and most important term that needs to be understood. Not appreciating how the CRA defines “residency” can lead to grave consequences. According to the latest definition, a resident is broadly defined as a person who has “significant” ties to Canada even while he or she is working abroad. These ties will include physical property such as a car, boat or home, a home, a cottage or a spouse. Furthermore, less “physical” ties will include (but may not be limited to) bank accounts, Canadian health insurance and indeed any other tangible assets that are based out of Canada. Still, this term of residency is broken down into four separate categories. Let’s take a look at each.

A Factual Resident
Let us first assume that a person has left Canada for an extended period of time to work overseas. Also, we will further state that this individual in question maintains significant ties (as defined above) to the country. For tax purposes, he or she will already be considered a Canadian resident. This is where it can be a bit confusing. Depending on the country abroad where the individual is staying and if this country has a tax treaty with Canada, the person will be considered a “non-resident” of Canada and instead a resident of the overseas country where he or she is located. This is known as a factual resident. The end result of this status is that the taxpayer will be treated as if they had never left Canada. Thus, all of the domestic rules and regulations from the CRA will still apply.

A “Deemed” Resident
This is another category that includes a broad range of possibilities. If you fall under any of the terms we are about to mention, the chances are high that you will be considered a deemed resident. These stipulations include members of the Canadian Armed Forces and government employees who work overseas. Also, those who are working with the Canadian International Development Agency are also deemed residents. Those who are dependent children of any of these previously mentioned factors are also deemed residents. Finally, anyone who may be exempt from 90% taxation on their globally accrued income are thought to be deemed residents.Deemed residents will need to report their income while being able to claim deductions, tax credits and apply for GST or HST credits. They cannot claim territorial tax credits and instead will be required to pay a surtax. However, if this individual still operates a business on Canadian soil, these taxes and credits would apply.

Non-Residency
By definition, this is someone who claims permanent overseas residency and dissolves any ties (mentioned previously) with Canada. The year that they leave the country they will be known as an emigrant and all subsequent years that are a non-resident. In this case, a non-resident would only have to report income that was generated through Canada (Canadian businesses, grants, a sale of Canadian property, etc.). If this non-resident derives income through investments, the payable tax is withheld before the payment is made to the individual. In cases when the tax is not withheld, the institution or bank needs to be told that their account holder is considered to be a non-resident. This is the responsibility of the non-resident.

Deemed Non-Residency
This will occur with a person who has severed all ties with Canada and instead has developed strong ties with another country abroad. They will need to be considered a resident of the overseas country in question as well. Should this country also be under a tax treaty with Canada, this “deemed” status will apply. For all income tax purposes and concerns, deemed non-residents will be categorized the same as would non-residents. Speak with a qualified tax representative for more information in regards to deemed non-residency.

Special Tax Credits
There are certain tax credits that factual and deemed residents can apply for. These will include overseas employment tax credit and foreign tax credit. Both of such options will aid in reducing the taxes payable to the Canada Revenue Agency.

Still, these are but a handful of the most important guidelines and this article should serve as a broad outline. There may be situations that are not applicable here. These can include those who resided in Quebec before deciding to leave Canada, missionaries, those eligible for Canada Child Tax Benefit and other benefits that are based off of a certain residency status. To learn a bit more about these and other such situations, it is a good idea to visit the web page of foreign Affairs and International Trade Canada. Also, you can choose to speak to a qualified tax representative who is very familiar with overseas tax laws and your obligations as a citizen. If you are considering leaving Canada to live or work abroad, it is critical to appreciate what category you will fall under and the obligations that you will be required to attend to.

Eric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.